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BE PREPARED FOR POSSIBLE CHANGES IN TAX RULES

Jay Tinker: Tis the season – tax season. April 15 looms large with tax returns due, but this isn’t about the filing deadline that is coming soon, though I do hope the process has been as pain-free as possible and that you have the help you need to get your 2023 tax year returns filed on time – or obtain an appropriate extension. 

Rather, I wanted to talk to you about the future of taxes, at least in the near term given the current circumstances we find ourselves in. Under then President Trump the Tax Cut and Jobs Act (TCJA) was approved effective January 1, 2018 after being passed by Congress. This was the largest overhaul of the tax code in three decades impacting both corporate and personal income taxes. However, most of the personal income tax components were temporary and are scheduled to expire at the end of 2025. Some examples of the current TCJA personal income tax components include (among many others):

• Lowering most of the tax rates associated with middle and high income tax brackets.
• Substantially increasing the standard deduction applicable to either single, head of household or married filing jointly tax returns.
• Limiting the State and Local Income Tax Deduction (or SALT) to $10,000 per year when itemizing deductions.
• Suspension of the personal exemption

Again, this is not a complete list but more importantly these and other personal tax provisions of the TCJA are set to expire at the end of 2025 and the pre-TCJA structures are scheduled to resume in 2026 and beyond (absent further Congressional/Presidential action). So what? Well, beyond the obvious of an evaluation of your tax withholdings in 2026 and beyond, these have significant implications for tax planning. For example, let’s say you are considering the trip of a lifetime in the next couple of years for you and your spouse. If you intend to withdraw additional funds from your 401k to cover the costs of the trip you may experience significantly different marginal tax effects depending on whether that withdrawal occurs in 2025 or 2026. Same thing if you plan to fund gifts to family (college, wedding, home purchase, etc) or have major home maintenance items like HVAC systems, roofing, etc.

Stated differently, withdrawing more from your 401k in either 2025 or 2026 could result in more of the funds being sent to the IRS and less available for your intended purpose. Of course, every family is subject to different circumstances. Not all taxpayers win or lose when there are changes in tax law and your specific experience will depend on your circumstances. Nobody is better equipped to evaluate what this will mean to you than you, along with your trusted financial and tax advisors. I encourage you to start these conversations sooner rather than later, particularly if you are planning on funding significant gifts or expenditures in the next couple of years. In the meantime, here are a couple of excellent resources to help you to understand what is happening and to decipher what it means for you and your family. Take care.

Tax Cuts Are Set To Expire — Here’s How Much More You’ll Pay

2026 Tax Brackets: Why Your Taxes Are Likely to Increase and What to Do About It

What to Do Before Tax Cuts and Jobs Act Provisions Sunset | Kiplinger